At face value the current debate appears to revolve around the extent of government regulation. Should big banks have more regulations or higher capital requirements than smaller banks that are not “systemically important,” meaning their failure would not lead to broader financial problems? To what extent should regulators prevent discrimination against borrowers or ensure some modicum of competition?

But at a more basic level the battle is about who gets to allocate capital. The answer for many on the political left is that it should be the government, and they’ve had amazing success in bringing that about in some sectors. It’s not entirely clear that the right opposes that idea.

Student loans / For starters, consider the market for student loans. It is completely dominated by the federal government, of course. Under its virtual monopoly, borrowing for college has skyrocketed, and total student debt now exceeds $1.3 trillion. To say that this lending market has problems is an understatement: over 40% of people holding student debt are not making payments, according to a recent Wall Street Journal analysis.

The reason for this failure is that the disintermediation created by government‐​guaranteed student loans frees schools from having to worry about whether students who secure their loans through the financial aid office will actually repay the debt. The school won’t be out of luck if there’s a default; it’s the government. And since college debt isn’t dischargeable under bankruptcy except under circumstances of extreme poverty, the feds can eventually get their money from all but the poorest borrowers. More than a few schools exploit this government guarantee to target students of dubious ability and means and sign them up for student loans to finance their classes.

Housing finance / Clearly this is not a recipe for a healthy lending market. But it is not unique; in fact, it bears a striking resemblance to the lending market for housing. These days, government‐​controlled Fannie Mae and Freddie Mac essentially are the market, as there is virtually no private activity in the creation of the mortgage‐​backed securities that ultimately finance most home loans. There’s also a disconnect between the nominal lenders and the ones who end up holding the capital: as long as the local mortgage provider can sell a loan, it will make it. Fannie and Freddie are the only ones doing the buying. They have become more selective about what mortgages they buy, but they are receiving the same political pressures they did a decade ago to cease “discriminating” against the poor and minorities, and to buy loans from less creditworthy applicants with less money down.

It was never the policymakers’ intent that these government‐​sponsored enterprises essentially control most of the capital in the home loan market. But that lack of intent does not mitigate the problems this dominance creates. While not everyone necessarily sees this as a problem, the Federal Housing Finance Administration—Fannie and Freddie’s overseer—has decided it will assuage those who don’t like it by creating a “common trading platform” that ostensibly will make it easier for the private market to compete in the securitization of housing assets.

It’s a fool’s errand, however. As my Cato colleague Mark Calabria and I recently wrote for Bloomberg BNA, the private market is not sitting out of the mortgage‐​backed securities market because it does not have the right software (“Can the Private Market Return to Home Lending?” July 14, 2016). The issue is that if there is another housing downturn, investors holding Fannie and Freddie paper know they’re safe thanks to government protection; not so for private housing paper. Nobody wants to be on the hook if the housing market tanks again, so Fannie and Freddie have the market to themselves these days.

Government as lender / The government is the only game in town in two different trillion‐​dollar lending markets, and that should concern everyone. There’s no evidence that these markets function any better because of government’s outsized role—far from it, in fact.

The reality of financial markets is that sometimes borrowers will find themselves unable to pay back their lenders no matter how much due diligence the lender did. Occasionally these defaults may create larger systemic problems that can bankrupt lenders or hobble the wider economy. Government can regulate capital markets as much as it wants, but it cannot change this eventuality. Punitively punishing the “bad actors” in the financial crisis that dared compete and socializing entire lending markets are not good policy solutions.

It’s impossible for any government to resist making investments for political reasons once it gets its hands on capital. Japan discovered this decades ago and China is learning it now. Less than a decade removed from a housing crisis that nearly destroyed global financial markets that was made worse by bipartisan pressure to boost home ownership through any means necessary, our government has resumed putting pressure on Fannie and Freddie to support extending mortgages to riskier borrowers.

The government’s financial meddling doesn’t stop with student and home loans. If the U.S. Department of Labor succeeds in making it easier for states to run their own retirement accounts, those efforts could evolve into the states using their inherent competitive advantages to squeeze out private fund providers. If we think we are above the self‐​dealing and corrupt “investments” that Asian countries make with the capital their governments control, we are delusional.

Before the government becomes a player in yet another financial market, we should take steps to reverse its oversized presence in lending.